The Truth: What Obama and McCain won’t tell you about your money

October 7 127 Comments latest by Tim

After watching the debate tonight, I figured I’d translate what both candidates were saying. Sorry I’m not as politically correct as them, but I hope this is informative.

Things will get a lot harder before they get better.
All the predictions about the recovery taking until “at least the end of the year” are horseshit. In truth, nobody knows, but it would be political suicide to admit that a recovery — whatever that means — will take a few more years. The truth is, nobody knows how long it will take. But if there’s one thing Americans love, it’s a leader pretending to know everything. And if there’s another, it’s that Americans love a quick fix…only to later complain about it not being done right.

Your questions about how “quickly” we can get out of this crisis are misguided.
Sometimes a forest needs to be cleaned out with fire before it can grow again. Again, an unpopular position. Since the government has virtually unlimited resources, it can certainly alleviate the pocketbook pain we’re feeling…but it will come back to bite us in the ass later.

Not all homeowners deserve to stay in their houses.
Renting is a perfectly reasonable alternative, but the idea of Americans “losing their houses” is politically untenable. Why? Because America perpetuates a mistaken culture of homeownership. Owning your own home is the kind of BS sacred cow that got us into this mess: Our parents tell us to buy a house. Our friends are impressed if we own a house in our twenties. The government literally encourages us to own a house by offering tax deductions. Homeownership is the American Dream!

The truth is, if you’re making the largest purchase of your life, you need more than a slogan — you need to take the responsibility to do some research. (And note that you can’t advocate for increased homeownership and also argue for Americans to keep their houses. By not reducing the prices, younger people cannot buy houses at these inflated prices.)

Yes, there was an exceptional amount of predatory lending.
For every blogger who argues loudly about personal responsibility, an angel dies and an Ogilvy executive lights a marshmallow in hell and eats a delicious snack. Wall Street and realtors are also to blame for this. But so are average Americans. It’s difficult to have a nuanced discussion about real estate on the campaign trail, so we resort to cartoonishly simplistic caricatures of things like Wall Street’s corruption. True — but also take a look in the mirror.

Homeowners are delusional about how much their houses are actually worth (see this, too).
As a wise commenter said, “I love the fact that it’s “acceptable/normal” for a home to increase its value by 100% during a five-year time frame, but it’s “unreasonable/impossible” for a home to decrease it’s value by 30-40% during a similar time frame.”

Taxes: Pandering to ordinary Americans instead of telling them to stop spending on stupid stuff
The reason Obama and McCain spent so much time talking about taxes is that most Americans are historically horrible at managing their spending. Since they make a fixed amount of money (revenue) and can control only one thing (costs), both politicans use tax breaks to pander to voters. Most people have never seriously thought about how to make more money. Fine. But what’s even more outrageous is Obama and McCain’s complete lack of honesty about what people really need to do to weather the economic crisis. Did you hear either one plainly say, “You’re going to need to buckle down and save more?” Of course not. You might as well walk into a Dave Ramsey seminar and argue that credit cards are a useful tool. It’s a suicidal suggestion. But it’s true.

Shut up about your money worries unless you’ve taken the time to read a book about how money really works
You need to read a couple of good books about money. Not read the screaming headlines of CNN.com. But a real book that explains how money works. If you don’t, do you really have the right to complain about how scared and nervous and worried you are about your money? (Note: If you want to get my favorite book recommendations, sign up for my free newsletter by Friday, 10/10/08. In fact, I’m giving away free personal-finance books in the upcoming weeks.)

Americans don’t know how to be frugal — yet
Things will get more expensive. Taxes will eventually go up. They have to. Costs of ordinary goods will go up. They always do. If you’re expecting it to get easier, you’re wrong. The key is to make more money and cut your costs. Sadly, Americans are poorly versed in being frugal. You think it makes sense to buy a new car every few years? You think it’s normal to eat out 5 times per week (lunch and dinner)? You feel good about yourself for ordering water when you go to a restaurant, but you blew $50,000 because you didn’t take the time to understand your mortgage? You’re not frugal. But a few more years of an economy like this and things just might change.

Sensible investors don’t change strategies very much — even in a market like today’s
With the market cratering hundreds of points every day — then climbing a similar amount the very next day — billions have been pulled out of the market. Yet long-term investors have the discipline to stay steady. Panicked spouses and overconfident investors think they know better by trying to time the market, but they’re wrong. In fact, here’s an excerpt from my upcoming book:

Recently, a group called Dimensional Funds studied the performance of the S&P 500 from January 1970 to December 2006, during which time the annualized return of the market was 11.1%. They also noted something amazing: Of those 36 years from 1970 to 1986, if you missed the 25 days when the stock market performed the best, your return would have dropped from 11.1% to 7.6%, a crippling difference.

Now, if only we could know the best investing days ahead of time.

Of course, we can’t. That’s why I continue to dollar-cost-average money into the market, slowly. Will it go down in the short-term? Almost certainly. But as my funds get cheaper and cheaper, I’ll pick up more and more shares. And eventually — over a 10, 20, or even 50-year time horizon, I’ll make a significant amount.

But encouraging people to continue investing during times like this wouldn’t be received well. More often than not, politicians need to seem to be doing something — ANYTHING!! — in order to keep you happy. Frankly, with a balanced portfolio, there’s really not much to change. But that’s not sexy enough to tell most people. (Plus, they have no idea what a balanced portfolio is.)

Sorry if I was too harsh. I’m usually not political, but I’m tired of the bullshit around our money. Every single one of us knows co-workers, family, or friends who are worried about their money. It’s time to get honest about what’s going on. (Want to read more? Check out my popular articles, personal-finance links, and my forum.)

More to come in future posts.

I’m trying something new: If you liked this, please digg this article.

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127 Comments latest by Tim

You have $100 extra per month. Should you pay off your mortgage early or invest?

September 11 22 Comments latest by Jen

Two answers:

1. Invest (Consumer Reports)
2. Run the numbers (Get Rich Slowly)

The key thing here is to actually do an analysis, as opposed to throwing around hand-wavy arguments like “Renting is throwing your money down the toilet” and “Leverage always makes you money.” If you make a financial decision that will cost you hundreds of thousands of dollars without doing real math on a spreadsheet, then you are a moron. In fact, it should be so hard that you have to get help from other people.

Note: I also keep a list of real-estate bookmarks here.

(6 votes, average: 3.33 out of 5)

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22 Comments latest by Jen

My friend was about to buy a million-dollar house with no research

January 7 59 Comments latest by Madeline Benham

Note: I’ve created a new category called “Real estate” (see the other categories on the right side of the blog).

One of my friends is 28 and she’s looking to buy a house in San Francisco pretty soon. Now, as you know, I’m not a big fan of real estate for investment reasons, but because I’m not an expert, I’ve been researching it more and more (see my links here). So when she mentioned wanting to buy a house, I asked one question: “Why?”

This is where things fell apart.

Her responses included things like:

“I don’t want to waste money paying rent.” I’m convinced this awful phrase was invented by Realtors BECAUSE IT’S SIMPLY NOT TRUE FOR EVERYONE. YOU ARE NOT WASTING RENT IF YOU LIVE IN AN EXPENSIVE AREA. Here’s a good article with more details.

I asked what she thought about the real-estate market right now, considering many of the ARM resets are still coming. One response: “The market is already bad, so there’s upside potential when I sell? what do you think of that logic? Prices are supposedly lower right now as a result.” I don’t think logic is enough to justify the biggest purchase of your life.

I also pasted a couple of the best articles on real estate: This one (Yahoo Finance) and this one (New York Times).

The result was interesting. She hadn’t seen these, so she asked me what I would do with my money. At this point, I was at a coffee shop and one of them lived near me, so she came over to talk about this in-person. I looked over her finances and realized she had tens of thousands of dollars just sitting around, earning hardly any interest. Even putting it in an ING savings account would have gotten her hundreds of dollars a month (open an ING savings account in 10 minutes).

The first thing I did was suggest three books to her on investing (more books I recommend). We talked for a while, and I suggested some things she could do to improve her finances and start earning more. After about 20 minutes of back-and-forth, I asked her what she was going to do for her next steps. “I’m going to be honest,” she said. “I’m not going to read those books.”

I thought this was really fascinating. Here’s someone who has tens of thousands of dollars earning 0.5% interest and she’s so resistant to the idea of reading investment books that she almost bought a million-dollar house instead. Five years ago, she had a significant amount of money. What if she had invested it in the stock market?

And five years from now, wouldn’t she be happy that she spent 5-10 hours reading a few books to get her finances in order?

Why young people still think of real-estate as an investment
One of the best things to happen from the real-estate bust that we’re undergoing is to make people think twice about real estate as an investment. That’s right — to actually consciously think about why they’re making the biggest purchase of their lives, rather than just buying a house because “it’s the next thing to do.”

And yet, I’m still stunned when I hear about my friends “investing” in real estate, especially in the Bay Area. (Yes, real estate can be profitable and great, but in some areas of the country there are far better investments).

I thought about it over the weekend, and I think there are a few reasons why real estate still seems to appealing to my friends:

1. They have some money lying around and know they should be doing something
2. They don’t know anything about investing, and the barriers to knowledge seem high
3. Real estate represents something tangible — and something their parents probably keep reminding them about
4. Society still explicitly and implicitly rewards homeowners (just think about a young friend who owns a home — are others impressed?)
5. THEY HAVE BEEN IGNORING EVERYTHING IN THE NEWS EVERY DAY FOR THE LAST 1 YEAR ABOUT REAL ESTATE (???)
6. It’s easier to do new things than to look back at old things, like reading books or handpicked articles about real-estate (Seriously, how many people will click and read through those links?)

Research for gargantuan purchases = good
Here’s the point: Buying a house is the biggest purchase you’ll ever make. When you do it, you need to understand exactly why. That means an extensive amount of research. When I bought a car, for example, I spent months learning about every trick under the sun. I had 17 dealers negotiating with each other to get my business. And that was to save a few thousand dollars! Now, I’m Indian and I’m weird, but I did that for buying a car. When I buy a house, I expect to enlist the help of several third-world researchers for months of research and, when I walk into the final negotiation, I will be accompanied by a large hairy man, a metal baton, and a chimp. IT’S THE BIGGEST PURCHASE OF YOUR LIFE. WHY WOULDN’T YOU SPEND TIME UNDERSTANDING THE PROS AND CONS OF IT?

You know, on one hand, much of this site is about getting started and not spending too much time doing endless research. But there’s a balance, as I describe in my article on conscious spending — you need to know the basics, and you need to know much more for real estate, which you can’t just sell the next day if you decide you don’t like it. When I pointed out sites like Patrick.net to my friend, she had never heard of them.

As usual, there are lots of ads and media influences to buy, but ultimately we make the decision on how much to research our real-estate purchases. I’m not saying it’s a bad decision — although my real-estate colors are clearly showing — but when I read a real-estate blog like SocketSite, I realize I’m not nearly as knowledgeable about real estate as others.

The 3-Book Solution
For many, what seems like an intimidating amount of research can be broken down by buying 3 books and reading them. Instead of coming in with a blank slate, you go to Amazon, find the highest-rated books in your area, and read them in a couple of weeks. I’ve done this with books on marketing, venture capital, and psychology. I keep a notepad and write down my questions. After 3 books, you’ll have very targeted and specific questions to ask someone. (Instead of “what should I do???” you might say, “Should I choose a Roth IRA or Roth 401(k)?”)

In July, I wrote about how asking targeted questions can get you targeted answers. To get the right answers about investing, pick up a few books — whether these ones or other ones — and get started by asking the right questions. Here are the three best books to get started investing.

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59 Comments latest by Madeline Benham

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